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Ultra Adds Niobrara; Sees Record Output in Pinedale, Marcellus

Driven by record natural gas output from core holdings in the Pinedale Anticline of Wyoming and the Marcellus Shale in Pennsylvania, Ultra Petroleum Corp. on Wednesday reported quarterly profit numbers that beat Wall Street's expectations. The Houston producer also disclosed that it established a third core area, almost 100,000 net acres in the liquids-prone Niobrara formation of the Denver-Julesburg (DJ) Basin of Colorado.

Ultra's production in the second quarter totaled 59.1 Bcfe, which was 13% higher year/year. In the Marcellus Shale alone net output soared 321%, averaging 106 MMcfe/d, versus 33 MMcfe/d in the year-ago period. Production in the latest quarter also was 6% higher than in the first three months of this year. Production was comprised of 57.1 Bcf of natural gas and 332,800 bbl of condensate.

CEO Michael D. Watford discussed the company's performance during a conference call with energy analysts. Wyoming output was at its "peak" and drilling more wells with the same rig fleet and Marcellus Shale production in Pennsylvania is "accelerating each and every quarter. With two thirds of our Marcellus wells to come online in the second half of the year, we are looking forward to the successful execution of our plan we established at the beginning of this year," he said.

During the latest quarter Ultra participated in drilling 38 net Wyoming Lance wells, up from 30 net wells in the year-ago quarter. Ten drilling rigs were active on Ultra-interest lands, said Bill Picquet, senior vice president of Operations.

"Ultra and its partners brought on production 81 gross, 43 net, wells during the second quarter, compared to 68 gross, 37 net, wells during the prior-year period," Picquet told analysts of the Wyoming leasehold. "The average initial production [IP] rate for the Ultra-operated wells was 7.6 MMcf/d, while the average for all wells brought online was 7.2 MMcf/d. This compares to an average of 7 MMcf /d in the first quarter 2011 for all wells brought online." Net output in the second quarter averaged 543 MMcfe/d and Ultra "achieved a new peak net production record of 570 MMcfe/d."

In the Marcellus, Ultra and its partners drilled 50 gross (23 net) horizontal wells in the latest quarter, said Brad Johnson, vice president of Reservoir Engineering and Development. "Currently, there are 10 horizontal drilling rigs active on Ultra-interest lands." The partners brought online 20 gross (14 net) horizontal Marcellus wells in the latest quarter, which is a 75% increase in net new well startups compared with 1Q2011, he explained.

Net production averaged 106 MMcfe/d, which is 16% higher than in the first three months of 2011 and 320% higher year/year. "In July, net production reached 131 MMcfe/d, surpassing the company's peak production record achieved during the second quarter of 118 MMcfe/d," said Johnson.

Johnson made no mention of an ongoing investigation of shale producers by the Securities and Exchange Commission, which has subpoenaed production records from several of Ultra's drilling peers (see Shale Daily, Aug. 10). However, he appeared to shoot down questions about Ultra's production rates in the Marcellus.

Marcellus IP rates and estimated ultimate recovery (EUR) rates just keep getting better, he said. "The Marcellus horizontal wells demonstrate flatter declines, and EURs are up. This is not based solely on a decline curve analysis." The company, he said, has "incorporated analytical models...used advanced well performance models...to confirm production forecasts and estimates." Those models showed "strong" growth in reserves on "tight curve models."

The company's "grassroots exploration effort to establish a third core area" also has paid off, said Watford. The company "has assembled a substantial acreage position in a liquids-prone development area" by amassing nearly 100,000 net acres in the DJ Basin and it plans to drill and complete several Niobrara exploration wells this winter to further evaluate the potential for oil production.

"Our New Ventures team has evaluated over 125 different projects this year with the goal of identifying opportunities complementary to our long-life, high-returning assets," said the CEO. "We are encouraged by the potential this play holds to add a meaningful third leg to our business. We believe our low-cost entrance into the Niobrara will afford us the cost structure, margins, and scale to be successful...Our newest play in Colorado plus our legacy assets in the Pinedale and Marcellus provide us with a more balanced portfolio of projects to generate profitable growth for many years to come."

Ultra's net profit was $103.5 million (67 cents/share) in 2Q2011, up from $61.5 million (40 cents) in 2Q2010. Year/year cash flow rose 34% and operating revenue jumped 23% to $280.6 million. Analysts on average were expecting the producer to earn 65 cents/share.

Capital spending will be higher through the rest of this year, Watford said. Ultra's board of directors approved a $250 million increase to $1.35 billion from the original planned spending of $1.1 billion. The increase will target "continued productivity gains" in Wyoming and Pennsylvania "in response to positive results and service cost inflation" and because of spending planned in the DJ Basin.

"Our revised capital budget for 2011, while less than 2010, positions us to enjoy the continued efficiency gains in Pinedale, allows us to begin acceleration in Marcellus due to improving results, permits us to offset an average 11% service cost inflation and initiates the funding of a grassroots low-cost oil asset to the company," he said. "A capital increase at this time funded with low-cost debt will provide us with the opportunity to revisit 2012 production guidance later this year."

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